Article | Intelligent Investment
Investment performance in the UK living sector over the last three years
January 29, 2025 6 Minute Read
Investor interest in the UK living sector has remained strong, despite challenging conditions in the wider real estate market. The sector’s share of real estate investment volumes has risen from less than 10% prior to 2018 to approximately 20% annually for the past three years. Our 2025 European Investor Intentions Survey shows that the industrial & logistics and living sectors are the preferred choices for investors targeting the UK in 2025. Real estate lenders have also identified these sectors as their preferred options for originating new loans.
Most investment into the UK living sector to date has been directed to the multifamily and purpose-built student accommodation (PBSA) subsectors. Initially, much of the capital was used for the development of modern, investible stock in different locations, but these subsectors have matured over time and stabilised assets now account for a larger share of deals. Despite this, finding performance data for stabilised assets to support analysis, valuation, and underwriting in the UK living sector can be challenging.
CBRE’s Purpose-Built Student Accommodation index now provides 14 years of data on income, capital values, and total returns at an aggregate level, based on valuations of individual schemes we have conducted. More recently, the launch of CBRE’s UK Multifamily Index provides three years of data on rental and capital value growth, along with other metrics such as occupancy rates. These indices allow for performance comparisons between these two asset types, as well as with investments in the commercial real estate market.
What do these indices tell us about the income from living sector investments?
Figure 1 shows that gross income growth for PBSA and multifamily schemes over the last three years has been similar, at 7.6% and 7.9% per annum, respectively, with both above inflation at 6.1% per annum. However, multifamily income growth has tracked year to year movements in inflation more closely. The figures are based on assets let directly to students or residents and so reflect the operational performance of schemes.
Figure 1: Gross income growth for multifamily and PBSA investments
Both PBSA and multifamily benefit from the ability to regularly reset rents. For PBSA, this is in line with the academic year, but it fluctuates dynamically during the lease-up cycle based on student demand. In contrast, multifamily schemes see rent changes throughout the year due to a combination of new lets and renewals. This rent-setting process allows multifamily to more closely track UK inflation in real-time. Both sectors have also benefitted from acute demand and supply imbalances, which we expect to continue into 2025. These imbalances have led rental growth to match or exceed inflation in recent years, albeit rental growth is cooling.
Meanwhile, our indices show that stabilised schemes in both subsectors have had a similar and stable ratio of net to gross income over the last three years, with an average net to gross ratio of 74% for multifamily assets and 75-76% for PBSA assets. This has resulted in similar rates of net and gross income growth, despite the challenges of higher inflation in recent years.
What about the impact of rising interest rates on living sector investments?
This has affected pricing for almost all types of real estate since 2022, with increases in yields putting downward pressure on capital values. According to our indices, Multifamily yields rose by 66bps, while PBSA yields rose by 50bps in the two years to September 2024. Figure 2 shows that these changes in isolation would have led multifamily capital values to fall by 15% and PBSA values to fall by 10% – but for the positive impact of rising income over this period.
Figure 2: Impact of yield movements on multifamily and PBSA investments
Note: Commercial property figures based on CBRE UK Monthly Index
Despite this, rising yields did not have as large an effect as in the commercial real estate sector. There, rising interest rates, higher borrowing costs, and denominator effects in portfolios of multi-asset investors led yields to rise by 140bps in this period (based on assets in the CBRE UK Monthly Index). This rise was not mitigated to the same degree by increases in income, so capital values fell more steeply. However, it appears that the most challenging period is behind us for all real estate sectors, with the prospect of increased capital flows and further interest rate cuts as we move through 2025.
Figure 3 shows how capital values have been changing, demonstrating the resilience of living sector investments to capital market conditions in recent years. PBSA capital values continued to increase in the two years to September 2024, rising by 6.5%. In comparison, multifamily capital values declined by 4.8%, but this was still better than the 18% fall for commercial real estate. However, in addition to yields softening, capital values in both multifamily and PBSA were affected negatively by the removal of Multiple Dwellings Relief in England from 1 June 2024.
Figure 3: Capital value changes for multifamily and PBSA investments
Note: Commercial property figures based on CBRE UK Monthly Index
While the deeper decline in commercial real estate might be followed by a sharper rebound, we anticipate that the living sector will continue to perform well for UK real estate investors. This reflects the demand-supply imbalance that still exists for good quality rental accommodation in the UK, both in the private rental and student markets. Market conditions are driving up the numbers of renters due to the challenges homebuyers face in raising deposits and affording mortgage payments now interest rates have risen. Higher mortgage rates, along with factors such as taxation and regulation, are also leading individual private landlords to exit the market.
Therefore, we anticipate sustained demand from renters for professionally managed stock. Meanwhile, headwinds from the regulatory framework (such as second staircores), onerous planning policy, and the cost of construction present challenges for bringing forward new supply. This will likely lead the supply-demand imbalance to persist. We also anticipate continued investor interest, not least from institutional investors seeking to raise exposure to the living sector given the inflation protection that these investments have historically provided.
Related Services
Delivering accurate, timely and reliable residential property valuations. We offer a comprehensive suite of property valuation services based on a str...
We advise on all aspects of the multifamily market through our unparalleled advice on funding, development and transaction strategies.
Maximise value through holistic strategies for developing, investing in, and operating student accommodation.